We Listened So You Don’t Have To: Know Before You Owe Mortgage Disclosure Rule – Construction Lending Webcast, Part 1 of 2

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

The CFPB’s TRID Construction Lending webcast ran long, did not cover Closing Disclosures at all and was, frankly, a bit of a slog.

So, let me start by saying: You’re welcome.

But even docking points for reading directly from the regulation, the webcast was very helpful in that it answered a couple burning questions about the construction loans and the Loan Estimate. So what did we learn?

Construction Holdbacks Can Be Disclosed As “Other” Costs In Box H!

NAFCU has received multiple member questions about construction holdbacks (i.e., a portion of the loan which will not be disbursed until a later time) and how they should appear on the Loan Estimate. There is no direct guidance in the rules or the commentary on this issue, but the CFPB offered their analysis of the question. In the webcast, they posed the below question:

“Q26: How may a creditor disclose a construction holdback on the Loan Estimate?”

To begin with, the CFPB stated that the Loan Estimate should reflect the terms of the legal obligations created by the loan agreements involved. The CFPB stated that, as an amount contracted to be paid to a person other than the creditor, this can be listed as a line item under “other” costs pursuant to 12 C.F.R. § 1026.37(g)(4):

“§1026.37   Content of disclosures for certain mortgage transactions (Loan Estimate).

For each transaction subject to §1026.19(e), the creditor shall disclose the information in this section:

[...]

(g) Closing cost details; other costs. Under the master heading “Closing Cost Details,” in a table under the heading “Other Costs,” all costs associated with the transaction that are in addition to the costs disclosed under paragraph (f) of this section. The table shall contain the items and amounts listed under six subheadings, described in paragraphs (g)(1) through (6) of this section.

[...]

(4) Other. Under the subheading “Other,” an itemization of any other amounts in connection with the transaction that the consumer is likely to pay or has contracted with a person other than the creditor or loan originator to pay at closing and of which the creditor is aware at the time of issuing the Loan Estimate, a descriptive label of each such amount, and the subtotal of all such amounts.” (Emphasis added.)

The amount can be listed in Box H of the Loan Estimate and labeled “Construction Holdback,” or by some other term which clearly and conspicuously reflects the purpose of the proceeds.

Surprise Twist: Alternatively, Construction Holdbacks Can Also Be Disclosed In Cash To Close!

The CFPB offered an alternative method of disclosing holdbacks in question 27: allowing the amount to be factored into the Calculating Cash to Close table. You have to walk through the rule a bit to see how this can be done; it isn’t intuitive. We begin with what is included as “closing costs to be financed” in section 1026.37(h)(1)(ii):

“§1026.37   Content of disclosures for certain mortgage transactions (Loan Estimate).

[...]

(h) Calculating cash to close—

(1) For all transactions. Under the master heading “Closing Cost Details,” under the heading “Calculating Cash to Close,” the total amount of cash or other funds that must be provided by the consumer at consummation, with an itemization of that amount into the following component amounts:

[...]

(ii) Closing costs to be financed. The amount of any closing costs to be paid out of loan proceeds, disclosed as a negative number, labeled “Closing Costs Financed (Paid from your Loan Amount)”;” (Emphasis added.)

Straightforward enough…but not quite on point. But let’s look at the commentary to 37(h)(1)(ii) which advises how to calculate “closing costs financed:”

“37(h)(1)(ii) Closing costs financed.

1. Calculating amount. The amount of closing costs financed disclosed under §1026.37(h)(1)(ii) is determined by subtracting the estimated total amount of payments to third parties not otherwise disclosed pursuant to §1026.37(f) and (g) from the total loan amount disclosed pursuant to §1026.37(b)(1). If the result of the calculation is a positive number, that amount is disclosed as a negative number under §1026.37(h)(1)(ii), but only to the extent that it does not exceed the total amount of closing costs disclosed under §1026.37(g)(6). If the result of the calculation is zero or negative, the amount of $0 is disclosed under §1026.37(h)(1)(ii).” (Emphasis added.)

The CFPB suggests by including the construction holdback as one of these “payments to third parties not otherwise disclosed,” there is a cascading effect on the remainder of the cash to close table, which will result in an accurate disclosure. The calculation of the closing costs to be financed in section 1026.37(h)(1)(ii) affects the calculation of the “funds to the borrower” in section 1026.37(h)(1)(v). The end result, according to the CFPB, is that the cash to close box will accurately reflect the amounts the parties are actually responsible for at closing as a result of the loan agreement and the parties’ legal obligations.

We will blog again about other lessons learned in the near future. The webcast will be posted here once it is available. If you wish to check out the webcast yourself, I strongly recommend reviewing the presentation slides for questions of particular interest, and then fast-forwarding to that slide for further explanation.